Site menu

Search by ticker code:
Generic filters

Menu

Search by ticker code:
Generic filters

Search by ticker code:
Generic filters

WBC shares offer franking credits, but is WBC cheap?

The Westpac Banking Corp (ASX: WBC) share price is down 7% since the start of the year. Is the WBC share price cheap?

The Westpac Banking Corp (ASX: WBC) is currently trading around $21. Let’s run through two standard WBC share price valuation tools an analyst might use to provide his or her analyst valuation on an ASX bank share like WBC.

As you may know, this is the standard version. Keep in mind, standard doesn’t necessarily equal ‘good’. So, at the bottom of this article, we’ll provide some further resources to complement our potential indicative valuations. Basically, it goes without saying but these valuations are not guaranteed.

Bank shares like Westpac Banking Corp, Bank of Queensland Limited (ASX: BOQ) and National Australia Bank Ltd (ASX: NAB) are very popular in Australia because they tend to have a stable dividend history, and often pay franking credits.

In this article, we’ll explain the basics of investing in ASX bank shares. But if you’re interested in understanding the value of dividend investing in Australia (i.e. the benefits of franking credits), check out this video from the education team at Rask Australia.

To access our valuation models, videos and tutorials, consider subscribing to the Rask Australia YouTube channel. You will receive the latest (and free) value investing videos from our analysts. Click here to subscribe.

WBC share price: inside the PE valuation

It’s likely that if you have been actively investing in shares for more than a few years you will have heard about the PE ratio. The price-earnings ratio or ‘PER’ compares a company’s share price (P) to its most recent full-year earnings per share (E). If you bought a coffee shop for $100,000 and it made $10,000 of profit last year, that’s a price-earnings ratio of 10x ($100,000 / $10,000). ‘Earnings’ is just another word for profit. So, the PE ratio is basically saying ‘price-to-yearly-profit multiple’.

The PE ratio is a very general tool but it’s not perfect so it’s vital to use it with other techniques (see below) to back it up. That said, one of the standard ratio strategies even professional analysts will use to value a share is to compare the company’s PE ratio with its competitors to try to determine if the share is overvalued or cheap. It’s akin to saying: ‘if all of the other banking sector stocks are priced at a PE of X, this one should be too’. We’ll go one step further than that in this article. We’ll apply the principle of mean reversion and multiply the profits per share (E) by the sector average PE ratio (E x sector PE) to calculate what an average company would be worth.

If we take the WBC share price today ($21.05), together with the earnings (aka profits) per share data from its 2023 financial year ($1.74), we can calculate the company’s PE ratio to be 12.1x. That compares to the banking sector average PE of 13x.

Next, take the profits per share (EPS) ($1.74) and multiply it by the average PE ratio for WBC’s sector (Banking). This results in a ‘sector-adjusted’ PE valuation of $21.78.

Using a DDM for the better WBC share price

A dividend discount model or DDM is a much more robust way of valuing companies in the banking sector — if it’s done correctly (take your time!).

DDM valuation models are some of the oldest valuation models used on Wall Street and even here in Australia. A DDM model uses the most recent full year dividends (e.g. from last 12 months or LTM) or forecast dividends for next year and then assumes the dividends remain consistent or grow slightly for the forecast period (e.g. 5 years or forever).

To make this DDM easy to understand, we will assume last year’s dividend payment ($1.34) goes up at a fixed rate each year.

Next, we pick the ‘risk’ rate or expected return rate. This is the rate at which we discount the future dividend payments back to today’s dollars. The higher the ‘risk’ rate, the lower the share price valuation.

We’ve used a blended rate for dividend growth and a risk rate between 6% and 11%, then got the average.

This simple DDM valuation of WBC shares is $25.54. However, using an ‘adjusted’ dividend payment of $1.40 per share, the valuation goes to $25.10. The expected dividend valuation compares to Westpac Banking Corp’s share price of $21.05. Since the company’s dividends are fully franked, you might choose to make one further adjustment and do the valuation based on a ‘gross’ dividend payment. That is, the cash dividends plus the franking credits (available to eligible shareholders). Using the forecast gross dividend payment ($2.00), our valuation of the WBC share price estimate to $35.85.

Keep going

Simple valuation models like these can be handy tools for analysing and valuing a bank share like Westpac Banking Corp. And while these models can even make you feel warm and fuzzy inside because you have ‘put a value on it’.

That said, it’s far from a perfect valuation (as you can see). While no-one can ever guarantee a return, there are things you can (and probably should) do to improve the valuation before you consider it as a worthwhile yardstick.

For instance, studying the growth or increase in total loans on the balance sheet is a very important thing to do: if they’re growing too fast it means the bank could be taking too much risk; too slow and the bank might be too conservative. Then, study the remainder of the financial statements for risks.

Areas to focus on include the provisions for bad loans (income statement), their rules for assessing bad loans (accounting notes) and the sources of capital (wholesale debt markets or customer deposit). On the latter, take note of how much it costs the bank to get capital into its business to lend out to customers, keeping in mind that overseas debt markets are typically more risky than customer deposits due to exchange rates, regulation and the fickle nature of investment markets.

$50,000 per year in passive income from shares? Yes, please!

With interest rates UP, now could be one of the best times to start earning passive income from a portfolio. Imagine earning 4%, 5% — or more — in dividend passive income from the best shares, LICs, or ETFs… it’s like magic.

So how do the best investors do it?

Chief Investment Officer Owen Rask has just released his brand new passive income report. Owen has outlined 10 of his favourite ETFs and shares to watch, his rules for passive income investing, why he would buy ETFs before LICs and more.

You can INSTANTLY access Owen’s report for FREE by CLICKING HERE NOW and creating a 100% FREE Rask Account.

(Psst. By creating a free Rask account, you’ll also get access to 15+ online courses, 1,000+ podcasts, invites to events, a weekly value investing newsletter and more!)

Unsubscribe anytime. Read our TermsFinancial Services GuidePrivacy Policy. We’ll never sell your email address. Our company is Australian owned.

Information warning: The information on this website is published by The Rask Group Pty Ltd (ABN: 36 622 810 995) is limited to factual information or (at most) general financial advice only. That means, the information and advice does not take into account your objectives, financial situation or needs. It is not specific to you, your needs, goals or objectives. Because of that, you should consider if the advice is appropriate to you and your needs, before acting on the information. If you don’t know what your needs are, you should consult a trusted and licensed financial adviser who can provide you with personal financial product advice. In addition, you should obtain and read the product disclosure statement (PDS) before making a decision to acquire a financial product. Please read our Terms and Conditions and Financial Services Guide before using this website. The Rask Group Pty Ltd is a Corporate Authorised Representative (#1280930) of AFSL #383169.

At the time of publishing, the author or their clients may have a financial interest in some of companies or securities mentioned.

5%+ in passive income

Owen Rask’s investing report available

With bond ETFs like ASX:IAF and the S&P 500 riding high, now could be one of the best times to start earning passive income from a portfolio of shares and ETFs.

In this free analyst report, our Chief Investment Officer, Owen Rask, names 10 ASX stocks and ETFs to watch.

Unsubscribe anytime. Read our TermsFinancial Services GuidePrivacy Policy. We’ll never sell your email address. Our company is Australian owned.

Skip to content